2017

27.03.2017Danny Busch, Professor of Financial Law at Radboud University, Pierre-Henri Conac, Professor of Commercial an an Company Law at the University of Luxembourg, and Tobias Tröger, Professor of Private Law, Trade, and Business Law, Jurisprudence at Goethe University

Bank Resolution - Will it Work?

One year after its entry into force bank resolution in the euro area still has to pass its fire test. However, the pitfalls have already become obvious according to financial experts. During the IMFS Working Lunch, Danny Busch, Professor for Financial Law at the Radboud University, Pierre-Henri Conac, Professor of Commercial Law and Company Law at the University of Luxembiourg, and Tobias Tröger, Professor of Private Law, Trade, and Business Law, Jurisprudence at Goethe University and associated Professor at the IMFS, drew an interim balance.

"The concept of bail in is very tricky," Tröger criticized the instrument of creditor participation that incurs liability towards investors and creditors as well as outside creditors, covering a banks' losses. "It is very hard to predict the outcome of bank resolution". Referring to the Italian bank Monte de Paschi di Siena (MPS), Busch described how national governments tend to exploit the exceptions in regulation. "With the precautionary recapitalization national authorities remain in the driver seat," Busch said. One day before Christmas the Italian government allowed MPS to receive financial aid. According to bank resolution, precautionary recapitalization is reserved for viable banks whose resolution would endanger financial stability.

For Conac, who had been an advisor to the ESMA, the situation in Italy illustrates the political resistance against bank resolution. In his opinion, this should be eliminated."Mismanagement, political influence and bad governance are the reasons for banks going bust", he said. The political influence could lead to a mixture of bail in and bail out, which finally neutralizes bail in, Conac summarized.

Tröger pointed out that the request for higher equity in practice also presents many difficulties. Besides, due to the national differences in insolvency legislation cross-border resolution was very complicated. Tröger emphasized the need for a fiscal backstop. However, in his opinion the key message is clear: "Make bail in predictable".